Chicago, Ill. —While strategies to control costs vary across industries, achieving cost reductions is always a concern for procurement and supply chain executives. A new study from A.T. Kearney indicates that leading company procurement organizations are at the forefront of these reductions, delivering twice the cost reduction compared to other companies through excellence in managing categories, suppliers, and teams. These purchasing organizations also drive competitive advantage through supplier-driven innovation and risk management.
The study, “Procurement Powered Business Performance: Assessment of Excellence in Procurement (AEP) Study 2014,” also finds that most of the gains were made from 2008 to 2011, primarily driven by the need to reduce costs during the financial crisis that started in 2008. “We were surprised that after the gains made between 2008 and 2011, many companies only sustained their improvements over the last three years. The typical company may be ‘wasting a crisis’ by not continuing to enhance one of the most powerful levers to improve profitability and competitive advantage,” said John Blascovich, A.T. Kearney partner and co-author of the report, in a statement.
The study cites several reasons why many companies have not attained the next level of procurement performance including, “the lack of designated responsibility to take the lead for all major spend categories and explore broader value creation opportunities, weak strategic and organizational links to the rest of the business, and difficulty communicating the function’s return on investment.”
However, leading procurement organizations are delivering greater impacts to their businesses, particularly as they more closely integrate with business units and regions, which “has increased their relevancy, influence, and impact.” These companies are generating double the Return on Supply Management Assets (ROSMASM) performance levels compared to the typical company, according to the report. In addition, they are delivering benefits at a rate ten times greater than the cost of their people, technology and external support.
The study states:
“To be clear, procurement performance at most companies has not declined since the previous AEP study. Figure 1 shows some key ways in which the procurement function's status has slightly increased since then. Procurement has kept its seat at the executive table and better aligned itself with the overall business strategy. Most companies recognize sourcing's unique power to deliver major cost reduction and have mastered basic sourcing and contracting principles. Many have even awakened to the need to measure procurement performance.”
“As procurement excellence helps to generate benefits and have greater business impact, companies will be more inclined to free up funds for innovation, growth and improved shareholder value,” said Alex Ferrer, A.T. Kearney Procurement & Analytic Solutions director, in a statement.
While gains have slowed as some sourcing strategies – volume bundling, supplier consolidation, and competitive bidding – have met some resistance from suppliers, leading procurement organizations continue to achieve high performance levels by:
- Building high-performance teams as a catalyst for business alignment
- Reducing cost through category excellence
- Creating competitive advantage through supplier capabilities
- Investing in the procurement team to deliver durable superior performance
“Leading procurement organizations communicate what the function delivers to the company in terms that the business can understand, typically by using finance organization language to measure and share performance data,” said Stephen Easton, A.T. Kearney partner and co-author of the report, in a statement.